Pondering rate cuts, a Trump triumph and the AI boom
INVESTORS WANT ANSWERS TO THESE BURNING ISSUES
Our research company has in its 12-year existence now answered more than 168,000 investor questions, all posted on our website. Once a year or so, we highlight here some of the issues and questions that investors are fretting about. It’s that time again. Let’s look at five of the most popular question topics in recent months.
IS AI A BUBBLE?
A lot of pundits are comparing the artificial-intelligence boom to the dot-com bubble, but we think there is quite a difference. In the late 1990s, anything internet-related generated huge investor interest. Companies could add a “.com” to their corporate name and double the value of their company. Investors didn’t care about profits, only growth. They didn’t care about business plans. Anyone with an idea could raise hundreds of millions of dollars.
The AI boom is much different. Investors still care about profits. AI should significantly reduce costs (and increase profit margins) for a wide range of companies. Real dollars are being spent, and AI companies are reporting huge earnings growth already.
This is probably the key difference: Yes, stock prices are moving up fast, but earnings are moving up even faster. Thus, many stocks are much cheaper on a valuation basis than they were 18 months ago when the AI boom really began.
WHAT HAPPENS IF TRUMP WINS?
Despite the odds of a twice-impeached, multiple-lawsuit candidate winning the presidency, the potential second round of President Donald Trump is a big concern to investors. Some, however, are not worried. After an initial overnight crash when he won in 2016, markets soared up until the 2020 COVID-19 crash. Trump, despite any of his other policies (good or bad), is seen as being pro-business. And stock markets, representing businesses, responded well to some political moves.
But there can be a big difference between a president’s first term in office and their second term. Trump, should he win, can only serve for four years. No re-election is possible after that. Many investors fret that he will have nothing to lose, so he may embark on some crazy bills and strategies, not all of which will be favourable to investors.
This is a legitimate concern, if only for the following: markets hate uncertainty. A shift in political power is often about as uncertain as one can get.
WHEN IS THE BEST TIME TO BUY STOCKS?
We get this question a lot, and it is frustrating because we can’t answer it. No one — despite all the forecasters out there — really knows what is going to happen next. You can look at a million indicators and still get it wrong. We like this catchphrase: The best time to buy stocks is today. The better time was yesterday.
Stocks have risen for 200 years. Every crash and pullback has been a buying opportunity. Waiting to buy can work once in a while, but repeatedly? Not a chance.
If an investor is worried, they can always deploy cash on a regular basis, rather than all at once. But since markets tend to rise, it has proven that going in all at once gets you better investment returns. Investors waiting for a pullback often wait for years, and lose lots of potential profits as a result.
Our call? If you like a stock, buy it. Don’t play it cute with timing.
ARE INTEREST RATES REALLY GOING TO DROP?
Peak interest rates are now a more-or-less universal theme for investors. A lot is riding on the expectation that interest rates are going to fall. We, too, agree with this, but we think rates are going to fall in Canada much faster than they will in the United States.
The U.S. economy is (much) stronger and recent inflation numbers for Canada were quite benign. So, we would expect lower rates in Canada sooner and this might put more pressure on the Canadian dollar, which has not exactly been a stellar performer for some time.
Note, however, that lower rates do not automatically mean higher stock prices. Yes, companies will save some money, but since lower rates are universally expected, stock valuations likely reflect this expectation already.
SHOULD I SELL MY BONDS AND MOVE MORE INTO STOCKS?
Whenever an investment sector performs poorly (for example, bonds over the past three years), investors always ask us if they should switch from the weak to the strong (in this case, stocks). But we do not think this is the right question. The right question is: Is your asset allocation where you want it to be? If so, then there is no reason to shift from one asset to the other.
If an investor’s risk profile has not changed, then ditching bonds and adding more stocks is only going to make their portfolio too risky for them to handle. What’s more, such dramatic switches usually occur after an asset has already underperformed, and the horse, as they say, has left the barn.
Lower interest rates should help bond prices, but there’s no guarantee. Still, the most important decision for an investor is their asset mix. We would answer the question this way: Don’t get swayed by short-term movements. Stick to your plan. This is good advice in almost any investment scenario.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/short Fund may own non-canadian stocks mentioned.)
If you like this story, sign up for the FP Investor Newsletter.